moneycontrol.com Woe Te ae Network 18 i eaeTable of Contents Bullish Strategies 1. Long Call 2, Synthetic Long Cail 3, Short Put 4. Covered Cail 5. Long Combo, 6. The Collar, 7. Bull Call Spread: 8. Bull Put Spread 3. Call Backspread 10. Married Put, 11. Bull Calendar Spread, 12. Covered Combination, 13. Diagonal Bull Call Spread. 14. Stock Repair Strategy. 15. Protective Put Neutral Strategies 4. Long Straddle, 2. Short Straddle, 3. Long Strangle, 4, Short Strangle, 5. Long Call Buttertiy 6 Short Call Butterfly, 7. Long Put Butterfly 8. Short Put Butterfly 9. Strap 40. Strip 41. Long Cai Ladder, 12, Long Put Ladder, 48. Short Call Ladder 14, Short Put Ladder 18. Long Call Condor Spread 16. Short Call Condor Spread 17. Neutral Calendar Spread 18, Long Guts 19. Short Guts 20. Ratio Call Spread 21. Ratio Call Write 22. Ratio Put Spread 23. Ratio Put Write 24. tron Condors. 25. Iron Butterfly, 26. Reverse Iron Gondor. 27. Reverse Iron Buttery Bearish Strategies Short Call Long Put, Protective Cail Covered Put Bear Call Spread Bear Put Spread. Put Backspread. Diagonal Bear Pui Spread ‘moneycontrol.com cum 2BOOkIntroduction to Options ‘An Option is a financial dorivative instrument which gives the right but not the obligation to the option holder to either sell or buy an underlying asset at a pre-specified date i.e. expiry date and at a pre-specific price ie. the strike price. The option seller has the obligation to fulfll the transaction as and when the option holder domands (exercise or not to exercise decision rests with the option holder). The option writer receives a reward, for sale of this right to the option buyer, known as ‘Premium’ 2 types of Option: Call Option A Call Option gives an option buyer (then holder) the right but not the obligation to buy the undertying asset (siock, commodity, currency, elc.) al a pre-specific price (sirike price) and al a pre-specified date (expiry date) 2 Put Option ‘A Put Option gives an option buyer (then holder) the right but not the obligation to sell the underlying asset (stock, commodity, currency, etc.) at a pre-specitic price (strike price) and at a pre-specified date (exoiry date). Duration of an Optior In India, options can be traded for 3 months: 1. Near Month January (current on-going month) 2, Next Month February (next month) 3. FarMonth March (next to next month) Moneyness of an Option Comparing the spot price with the strike price at expiry date, Options will be classified under 3 categories: Call Option Moneyness | Put Option Strike Price < Spat Price In The Money __| Strike Price > Spot Price Strike Price = Spot Price ‘AtThe Money _| Strike Price = Spot Price Strike Price > Spot Price | Outof the Money | Strike Price < Spot Price The strategies mentioned In this e-book are only for learning purpose and cannot be construed as recommendations. Please consult your broker/financial adviser before executing a trade. ‘moneycontrol.com mmm BOOKS|, weStrategy 1: Long Call Explanation This is one of the basic strategies as it involves entering into one position i.e, buying the Call Option only. Any investor who buys the Call Option will be bullish in nature and would be expecting the market to give decent retums in the near future. Risk: The risk of the buyer is the amount paid by him to buy the Call Option .e. the premium value. Reward: The reward will be unlimited as the underlying asset value can rise up to any value until the expiry. Break-Even Poil : The break-even point for the Call Option Holder will be ‘Strike Price + Premium, Construction Buy 1 Call Option Payotf Chart LONG CALL, Example Currently NIFTY is trading around 5300 levels, and Mr. X is bullish on NIFTY and buys one 5200 Call Option (ITM) for Rs. 200 premium. Lot size is 50. The investment amount will be Rs. 10000. (20°50) Case 1: NIFTY closes at 5500 levels; Mr. X will make a profit of Rs. 5000. [(300-200)*50] Case 2: NIFTY dips to 5100 levels; Mr, X will Incur a loss of Rs. 10000 (20°50) which is the premium he paid for buying one lot of 5200 Call Option. ‘moneycontrol.com mmm BOOKStrateay 2: Synthetic Long Call Explanation A trader is bulish in nature for short term, but also fearful about the downside risk associated with it. Here, a trader wants to hold an underlying asset either in physical form Ike in case of commodities or demat (electronic) form in case of stocks. But he is always exposed to downside risk and in order to mitigate his losses, he will buy 1 ATM or OTM Pul Option since ITM Put option will carry more premium than ATM & OTM Put options which are relatively cheap. Case 1: If the prices rise as per his calculations, he will make unlimited profits on his long position in spot/cash market Case 2: If the prices fall, then his loss is covered by the Put Option. The loss incurred will be the premium ‘amount paid to buy Put option. The net position created from Synthetic Call strategy is similar to Call Option buy strategy. ‘A major difference exists between buying a Call Option and Synthetic Call strategy. In a plain Vanilla Call Option you do not hold the underlying asset, whereas in Synthetic Call you will hold the underlying asset and reap the benefits of dividends, bonus issues, etc. (only in case if the underlying asset is a stock) Construction Buy 250 RIL Shares Buy 1 Put Option of RIL Payoff Char SYNTHETICLONG CALL.” oss ray 0 * 7739 Breakoven Point) | Stock Price at TD Expiration moneycontrol.com mmm eBookExample RiLis trading at Rs. 720 levels, Mr. X is bullish in the long term, but wants to hedge himself from the fall in cash strategy goes wrong. He will buy 250 shares of RIL from the cash market @ Rs. 720 and buy 1 700 Put Option @ Rs, 10 as premium, The lot size of RILis 250. His net investment will be Rs. 180000. [(250°720) + Rs. 2500(250°10) = Rs. 182500] Reward: The gains will be unlimited since it's a long position, His maximum loss will be Rs, 2500 assuming he will hold his cash position irrespective of the price. Break-Even Point for the net position will be Rs. 730. (720410) Case 1: If RIL Gips to Rs. 690, then his net loss payott will be Rs. 7500. [{(690-720) + (10-10)}*250] Case 2: If RIL closes at Rs. 720, then his net loss payoff will be Rs. 2500. [((720-720)-(10)}*250] Case 3: If RIL rises up to Rs. 750, then his net profit payoff will be Rs. 5000. [((750-720)-(10))*250] ‘moneycontrol.com mmm BOOKStrateay 3: Short Put Explanation A trader will short put if he is bullish in nature and expects the underlying asset not level. fall below a certain Ri Losses willbe potentially unlimited if the stock skyrockets above the strike price of put. Reward: His profits will be capped by the premium amount received. Construction Sell 1 Put Option Payot Char Profitor! Lae ‘Short Put Payoff Diagram 3500 o 8am, Stock Price at Expiration Example ‘Suppose NIFTY is trading at 5200 level and Mr. X is bullish on the market, He expects NIFTY to stay near 5200-5300 levels or even rise further until expiry. He will sell one NIFTY 5200 Put Option for a premium of Rs. 70. The lot size of NIFTY is 50. Mr. X's account will be credited by Rs, 3500 (70°50) which is the premium received on sale of Put option. Case the NIFTY closes at 5400, then Mr. X will receive the maximum profit of Rs, 3500. Case the NIFTY closes at 5000, then Mr, X wil face a loss of Rs, 6500. [(200-70)*50] ‘moneycontrol.com mmm BOOKStrategy 4: Covered Call Explanation Mr. X owns Reliance Shares and expects the price to rise in the near future. Mr. X is entitled to receive dividends for the shares he hold in cash market, Covered Call Strategy involves selling of OTM Call Option of the same underlying asset, The OTM Call Option Strike Price will generally be the price, where Mr. X will look. to get out of the stock, He will receive premium amount from writing the Call option, Risk: Mr. X will incur losses on his short position when the stock moves beyond the strike price of the call written. This strategy is generally adopted by the people who are ‘Neutral or Moderately Bullish’ on the underlying asset. Reward: Mr. X will make profits when the stock price shoots up and pockets the premium which he received from shorting the Call Option, I it comes down then he is willing to exit at a point, the exit point is where Mr. X has shorted the Call Option. Construction Buy 250 RIL Shares Sell 1 Call Option Payolf Char Proftor + COVERED CALL 7500-4 Long Steck Fe 780 4 f. es Stock Prive at Expication Example RILis trading around Rs 745 levels. Lot size of RIL Option is 250. Mr. X is bullish in nature and buys 250 shares of RIL @ Rs 745 from the market. He also shorts one 760 Call Option for a premium of Rs. 15. His net investment willbe Rs. 182500, [((745)-(15)}*250] Case 1:If RIL closes at Rs. 755, Mr. X will get a capital appreciation on his investment of Rs. 2500. [(755- 745)*250] plus the Call Option premium he received from writing it i.e, Rs.3750 (15*250). His total gain will be Rs 6250. Case 2: If RIL closes at Rs. 780, Mr. X will make a profit on his long position in spot market but incur loss on his short call, His net payoff will be Rs. 7500. {((780-745) + (15-20))*250] ‘moneycontrol.com mmm BOOKStrateay 5: Long Combo Explanation Long Combo Option Trading Strategy is implemented when a trader is bullish in nature and expects the stock price to tise in the near future. Here a trader will sell one ‘Out of the Money’ Put Option and buy one ‘Out of the Money’ Call Option, This trade will require less capital to implement since the amount required to buy the call will be covered by the amount received from selling the put Construetion Sell 1 ‘Out of the Money’ Put Option Buy 1 ‘Out of the Money’ Call Option Payoff Chart Long Combo Prot 2 Loss| son 4 sin SHO NIFTY -2ns00: Payoff Diagram Example ‘Suppose NIFTY is trading at 5200 evels, Mr, X wants to enter in a tong combo strategy, he will sell one 5000 OTM Put Option for a premium of Rs. 25 & buy one 5400 OTM Call Option for a premium of Rs. 35. The lot size of NIFTY is 50. His net investment will be Rs. 500. [(35-25)°50] Case 1: At expiry if NIFTY closes at 4800, then Mr. X will incur a loss of Rs. 20500. [{(4800-5200) + (25- 35))°50] Case 2: At expiry if NIFTY closes at 5100, then Mr. X will make a loss of Rs. $500. [(5100-5200) + (25- 35)°50] Case 3: At expiry if NIFTY closes at 5600, then Mr, X will make a profit of Ris. 9500. {((200-35) + (25))*50) ‘moneycontrol.com mmm BOOKStrateay 6: The Collar Explanation Collar Strategy is an extension to Covered Call Strategy. A trader, who is bullish in nature but has a very low risk appetite and wants to mitigate his risk will implement the Collar Strategy. Collar involves buying of stock in either Cash/Futures Market, buying an ATM Put Option & selling an OTM Call Option, The expiry dates of the options should be same, Hore the long position will make profits if things go as per plan ic. stock gains. The put option will cover the losses if things go in the opposite direction. The profits will be limited on account of the sale of an OTM Call Option. Ri Limited Reward: Limited Construction Buy shares in Cash/Futures Market Buy 1 ATM Put Option Sell 1 OTM Call Option Payoff Chart ‘THE COLLAR Profitor Lossy etate Covered Weite 7a00+. s200of/ s4c0 of : J Stock P -2000'} Expiration Example Mr. Xis bullish on NIFTY and expects it to rise, but also very conservative in nature. He deploys Collar Strategy where he buys the underlying stock in the futures market, sells an OTM Call Option & buys 1 ATM Put Option. Now his net position is safe from adverse movements in any direction either down or up. Lot size of NIFTY is 50. He buys one NIFTY futures at 5200, sells one 5400 OTM Call Option at a premium of Rs. 25, & buys one 5200 ATM Put Option for a premium of Rs. 85. Case 1: At expiry if NIFTY closes at 4900, then Mr. X will make a loss of Rs. 3000. [((25)-(300) + (300- 85))"50), Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a loss of Rs. 3000. [(25-85)*S0] Case 3: At expiry if NIFTY closes at 5500, then Mr. X will make a profit of Rs. 7000. [{(25-100) - (85) + (300))"50] ‘moneycontrol.com mmm BOOKStrategy 7: Bull Call Spread Explanation Bull Call Spread option trading strategy is used by a trader who is bullish in nature and expects the underlying asset to give decent returns in the near future. This strategy includes buying of an ‘in The Money’ Call Option and selling of ‘Deep Out Of the Money’ Call Option of the same underlying asset and the same expiration date, When you write a call, you receive premium which results in reducing the cost for buying an ITM Call Option. However, the profits are also minimized in case of a windfall rise in the underlying asset's price. This strategy is also called as ‘Bull Call Debit Spread’ as your account gets debited while deploying the strategy. Risk: Limited Reward: Limited Construction Buy 1 ‘In The Money’ Call Option Soll 1 ‘Deep Out Of the Money’ Call Option Payoff Char Pal, BULL CALL SPREAD e000: ‘ S100 ss00 Steck Price at Expiration $500) Example ‘Suppose that the NIFTY is trading around 5180 level, and Mr. X enters into Bull-Call-Spread strategy. Lot Size of NIFTY is 50, He buys one 5100 ITM Call Option for a premium of Rs. 165, and sells one 5300 OTM Call Option for Rs. 55. The net investment will be only Rs. $500 [(165-55)°50], after premium received from writing the 5300 call. Case 1: At expiry if the NIFTY dips down to 5000 level, the maximum loss will be only Rs. 5500 (Investment Value). Case 2: At expiry if the NIFTY closes at 5200 level, net profit will be Rs. 6000, [((55) - (100-165)}*50] Case 3: At expiry ifthe spot NIFTY closes at $400 level, the intrinsic value ofthe $100 ITM call will be Rs. 300 and that of 5300 OTM call will be Rs. 100. At expiry, the cash settlement will be done with a credit of Rs. 4500, [(200-165) -(100-55))"50] ‘moneycontrol.com mmm BOOK 10Strategy 8: Bull Put Spr Explanation Bull Put Spread option trading strategy is used by a trader who is bullish in nature and expects the under ying asset to move in an upward trend in the near future. This strategy includes buying of an ‘Out of the Money Put Option and selling of ‘in the Money’ Put Option of the same underlying asset and the same expiration date. When you write a Put, you will receive premium thereby engulfing the cost for buying of OTM Put Option. This strategy is also called as ‘Bull Put Credit Spread’ as your account gets credited while deploying the strategy. Risk: Limited Reward: Limited Construction Buy 1 ‘Out of the Money’ Put Option Soll 1 ‘In the Money’ Put Option Payoff Chart ae . BULL PUTSPREAD . 0" Be Bama ‘Suppose that the NIFTY is trading around 5300 level and Mr. X enters into BullPut-Spread strategy. Lot Size of NIFTY is 50. He buys one $100 OTM Put Option for a premium of Rs. 45, and sells one 5400 ITM Put Option for Rs. 180. Hence his account will be credited by Rs. 6750, [(180-45)"50] Case 400))"50) t expiry if the NIFTY dips down to 5000 level, his net loss will be Rs. 8250. [((100-45) + (180- Case 2: At expiry if the NIFTY closes at 5200, then his net loss will be Rs. 3250. [((180-400)-(45))°50] Case 3: At expiry if the spot NIFTY closes at 5500 level, both the Puts expire worthless and Mr. X gets to keep Rs. 6750. ‘moneycontrol.com mmm BOOK hnStrateay 9: Call Backspread Explanation This strategy is adopted by traders who are bullish in nature. He expects market and volatility to tise in the near future. A trader need not be direction specific here (i.e. an upward or downward trend, but a small bias towards an uptrend should always be present, as the gains will be much higher once the market moves up rather than market moving down and keeping premium as income, This strategy involves buying of 2 OTM Call Options and selling 1 ITM Call Option. Risk: Limited Reward: Unlimited Construetion Sell 1 ITM Call Option Buy 2 OTM Call Options, Payoff Char Profit 4 orLees CALL BACKSPREAD sion 530053 0 ‘ 4250) Example ‘Suppose NIFTY is trading around 5200 levels, Mr. X is bullish on the market and the volatiily. He will apply Call Backspread Strategy. He will sell one 5100 NIFTY ITM Call Option for a premium of Rs. 165 & buys two 5300 NIFTY OTM Call Options at a premium of Rs. 60 each. His net investment will be Rs, 3250, [(165- (50°2))"50] Case 1 165))"50] \t expiry if NIFTY closes at 5500, then Mr. X will make a profit of Rs. 3250. {(((200-50)*2) + (400- Case 2: At expiry if NIFTY closes at 4900, then Mr. X will keep the premium amount received from sale of 5100 NIFTY ITM Call Option. His net gain will be Fis. 3250. ((165-(50°2))*50] Case 3: At expiry if NIFTY closes at 5250, then Mr. X will make a loss of Rs, 4250. [((150-165)-(50°2))°50] ‘moneycontrol.com mmm BOOK bStrategy 10: Married Put Explanation This strategy is applied when trader goes long on the underlying asset i.e. he buys the stock in cash market. He has a bullish view and expects the market to rise in the near future, but simultaneously has the fear of downward movement of the markets. In order to cover his position from vulnerabilities he buys one ATM Put Option of the same underlying asset. Here, a trader will receive all the gains {rom dividends, bonus issues since he is holding long positions in the cash matket, Ris! Limited Reward: Unlimited Construction Buy 250 RIL Shares Buy 1 ATM Put Option Payoff Chart MARRIED PUT Profit or mane Loss 745.77 o + < 35 dale Poin) ‘Stock Pace at aso Expiration Example ‘Suppose that RIL is trading at Rs. 745, and Mr. X is bullish on the market. He buys 250 RIL shares in the cash market. Now the risk always persist (downward move) and to cover himself from this adverse move he will buy one 740 RIL ATM Put Option at a promium of Rs. 20. His total investment will be Rs, 191250. [(745+20)*250) Case 1: Al expiry if RIL closes at Rs. 710, then Mr. X will make a loss of Rs. 6250. [{(710-745) + (30- 20)}"250) Case 2: At expiry if RIL closes at Rs. 740, then Mr. X will make a loss of Rs. 6250. [((740-745) — (20))*250] Case 3: At expiry if RIL closes at Rs. 770, then Mr, X will make a profit of Rs. 1250. [{(770-745) — (0-20)}*250] ‘moneycontrol.com mmm BOOKStrateay 11: Bull Calendar Spread This strategy is implemented when a trader is bullish on the underlying stock/index in the short term say 2 months or s0. A trader will write one Near Month OTM Call Option and buy one next Month OTM Call Option, thereby reducing the cost of purchase, with the same strike price of the same underlying asset. This strategy is used when a trader wants to make profit from a steady increase in the stock price over a short period of time, Risk: Limited Reward: Unlimited Construction Sell 1 Near-Month OTM Call Option Buy 1 Mid-Month OTM Call Option Example ‘Suppose NIFTY is trading at 5300 levels, Mr. X is bullish on the market and expects it to rise in the near future say 2 months or so. He will sell one $400 NIFTY April (near-month) OTM Call Option for a premium of Rs, 25 and buy one 5400 NIFTY May (next-month) OTM Call Option at a premium of Rs. 110. The lot size of NIFTY is 50. Hence, his net investment will be Rs. 4250. [(110-25)°50], Case 1: At Near-Month (April) expiry if NIFTY closes at 5000, then Mr. X will got to keep the promium amount ile. Rs. 1250. (25°50) ‘At Mid-Month (May) expiry if NIFTY closes at 4800, then Mr. X will make a loss of premium amount i.e, Rs. 5500. (10°50), His net payoff will result in a loss of Rs. 4250. (5500-1250) Case 2: At Near-Month (April) expiry if NIFTY closes at 5100, then Mr. X will get to keep the premium amount i.e. Rs. 1250. (25°50) ‘At Mid-Month (May) expiry if NIFTY closes at 5300, then Mr. X will make a loss on premium amount i.e. Rs. 5600. (110*250). His net payoff will result in a loss of Rs. 4250. (5500-1250) Case 3: At Near-Month (April) expiry if NIFTY closes at $500, then Mr. X will incur a loss of Rs. 3750. [(100- 25)°50] At Mid-Month (May) expity if NIFTY closes at 5700, then Mr. X will make a profit of Rs. 9500. [(800-110)*250] His net payott will result in a profit of Rs, $750. (9500-3750) Note: Calendar Straddle Option Trading Strategy is similar to this Bull Calendar Spread; the only difference is the position acquisition. In Bull Call Calendar Spread we trade in only Call Options, whereas in a Calendar Straddle we will sell one Near-Month Straddle and buy 1 Mid-Month Straddle (Straddle = 1 Call Option + 1 Put Option). The payolfs, ideology and construction of a Calendar Straddle will remain same as of Bull Calendar Spread. ‘moneycontrol.com mmm BOOK “Strateay 12: Covered Combination Explanation This strategy involves selling OTM Call & Put Options and buying the underlying asset in either cash or futures market. Itis also known as Covered Strangle as the profits are capped and risk is potentially unlimited. Risk: Unlimited Reward: Limited Construction Buy 250 RIL Shares Sell 1 OTM Call Option Sell 1 OTM Put Option Payoff Chart Profit ole COVERED COMBINATION 7780) 0 3 Siock Price at Expiration Example ‘Suppose RIL is trading at Rs. 745, and Mr, X has gone long on RIL, Now Mr. X will sell one 760 OTM Call Option for a premium of Rs. 15 and simultaneously sell one 720 OTM Put Option for a premium of Re. 1. His net invesiment will be Rs. 182250. [(745-15-1)"250] Case 1 745))"250] \t expiry if RIL closes at Rs, 700, then Mr, X will incur a loss of Rs, 12250, [{(18) — (20-1) + (700- Case 2: At expiry if RIL closes at Rs. 740, then Mr. X will make a profit of Rs. 2750. [((15) + (1) + (740- 745))"250] Case 3: 745))"250] ¢ expiry it RIL closes at Rs. 780, then Mr. X will make a profit of Rs. 7750. [{(1) ~ (20-15) + (780- ‘moneycontrol.com mmm BOOKStrategy 13: Diagonal Bull Call Spread Explanation This strategy is implemented by a trader when he is neutral — moderately bullish in the near-month contract and bullish in the mid-month contract. It involves sale of 1 Near-Month OTM Call Option and buying of 1 Mid- Month ITM Call Option. Risk: Limited Reward: Limited Construction Sell 1 Near-Month OTM Call Option Buy 1 Mid-Month ITM Gall Option Example ‘Suppose NIFTY is trading at 5300 odd points, Mr. X is neutral for the near-month contract and bullish for the mid-month contract. He applies Diagonal Bull Call Spread Strategy where he will sell 1 5400 Near-Month OTM Call Option for a premium of Rs. 25 and buy 1 5200 Mid-Month ITM Call Option at a premium of Rs. 235, His net investment will be Rs, 10500, [(235-25)*50] Case 1: At the Near-Month expiry it NIFTY closes at 5000, then Mr. X will get to Keep the premium amount of 5400 Near-Month OTM Call Option of Rs. 1250, (25°50) At the Mid-Month expiry if NIFTY closes at 4900, then Mr. X will make a loss on his premium amount paid for 5200 Mic-Month ITM Call Option ie. Rs. 11750, (235*50) His net payott will result in a loss of his entire investment value i.e. Rs. 10500. [(285-25)*50] Case 2: At the Near-Month expiry if NIFTY closes at 5200, then Mr. X gets to keep the premium amount of 5400 Near-Month OTM Call Option of Rs. 1250. (25°50) At the Mid-Month expiry it NIFTY closes at 5300, then Mr. X will make a loss on the 5200 Mid-Month ITM Call Option of Rs, 6750. [(100-235)°50] His net payott will result in a loss of Rs. 5500. (6750-1250) Case 3: At the Near-Month expiry if NIFTY closes at 5400, then Mr. X will get to keep the premium amount of 5400 Near-Month OTM Call Option of Rs. 1250. (25°50) Al the Mid-Month expiry if NIFTY closes at 5500, then Mr. X will make a profit on 5200 Mid-Month ITM Call Option of Rs, 3250. [(300-235)"50] His net payott will result in a profit of Rs. 4500. (125013250) ‘moneycontrol.com mmm BOOK 16Strategy 14: Stock Repair Strategy Explanation This strategy is used to cover up for losses made on long stock position. After the long position suffered losses on stock price fall, a trader will implement this strategy in order to bring down the breakeven price and capping his further losses thereby increasing his probability of loss recovery. Constru Buy 1 ATM Call Sell 2 OTM Call Options Payolf Char lproft y © STOCK REPAIR STRATE lorLos ’ 00) StExpiraton -14800 Example ‘Suppose Mr. X has purchased 1 lot of NIFTY Futures at 5400. Lot size of NIFTY is 50. Assume currently NIFTY is trading at 5200 translating it into loss of Rs, 10000 on his long position in future, (200°50) Now, Mr. X wants to repair his position so he implements Stock Repair Strategy by buying 1 5200 NIFTY ATM Call Option at a premium of Rs. 100 and selling 2 5300 NIFTY OTM Call Options for a premium of Rs. 110 (55*2). By implementing this strategy Mr. X’s account will get crodited by Rs. 500. {(100-110)*50] Case t expiry if NIFTY closes at 5100, then Mr. X will make a loss of Rs. 14500. [{(5100-8400) — (100) + (65"2)) 0) Case 2: At expity if NIFTY closes at 5300, then Mr. X will make a profit of Rs, 500. {((5300-5400) (100-100) + (85°2))"50) Case 3: At oxpity if NIFTY closes at 5500, then Mr, X will make a profit of Rs, 500, {((5500-5400) + (300-100) = ((200-55)*2)}*50] ‘moneycontrol.com mmm BOOK ”Strategy 15: Protective Put Explanation Protective Put Strategy is a hedging strategy where trader guards himself trom the downside risk. This strategy is adopted when a trader is long on the underlying asset but skeptical of the downside. He will buy cone ATM Put Option to hedge his position. Now, if the underlying asset moves either up or down, the trader is in a safe position Risk: Limited Reward: Unlimited Construction Buy 250 RIL Shares in Cash/Futures Market Buy 1 ATM Put Option Payoff Chart PROTECTIVE PUT rotor tong Loss 4 oJ __ re 740 745-7" 0 Pris towacvnton Stock Priceat Expiration 6250 Example ‘Suppose that RIL is trading at Rs. 745 and Mr, X buys 250 shares in the Cash Market, He will buy One 740 ‘ATM Put Option at a premium of Rs, 20 to hedge his long position. His net investment will be Rs, 191250. [(745+20)*250) Case 1: At expiry if RIL closes at Rs. 710, then Mr. X will incur a loss of Rs. 6250. [{(710-745) + (80-20))*250] Case 2: At expiry if RIL closes at Rs. 740, then Mr. X will incur a loss of Rs. 6250. [{(740-745)-(20))*250] Case 3: At expiry if RIL closes at Rs. 770, then Mr. X will make a profit of Rs. 1250. [{(770-745)-(20))*250] Note: It is observed that once the stock starts moving up, the time value of Put will shrink half times the cash price. This will also depend on the number of days left in the expiry. A professional trader can also keep a stop loss in ATM Put once stock rallies sharply. ‘moneycontrol.com mmm BOOK 1sNEUTRAL STRATEGIESStrategy 1: Long Straddle Explanation Stradale is neither bullish nor bearish strategy; itis a market neutral strategy. Here a trader wishes to take advantage of the volatility in the market, This strategy involves buying of one Call option and one Put option of the same strike price, same expiry date and of the same underlying asset. Now a trader is bound to make profits once stock moves in either direction. Ifthe prices rise significantly, the call generates income and put expires worthless. If the prices decrease significantly, the put generates income and call expires worthless, Here a trader is looking for high volatility and expects the market to move with high magnitude. Risk: Limited Reward: Unlimited Construction Buy 1 Call Option Buy 1 Put Option Payoff Cha Ra LONG STRADDLE ° ar Exprain wen Example Nifty is trading at $250 level; Mr. X expects the market to move with high magnitude in either of the directions, he will implement Long Stradale Strategy. He will buy one 5200 Call Option for a premium of Rs. 130 & buy ‘one 5200 Put Option for a premium of Rs. 65. Lot size of NIFTY is 50. His net investments will be Rs. 9750. [(130+65)'50] Case (130))"50] \t expiry if NIFTY closes at 4600 level, then Mr. X will make a profit of Rs. 20250. [((600-65)- Case 2: At expiry if NIFTY closes at 5100, then Mr. X will make a loss of Rs. 4750. [{(100-65)-(130))°50] Case \t expiry if NIFTY closes at 5600, then Mr. X will make a profit of Rs. 10250. {((400-130)-(65)}*50] ‘moneycontrol.com mmm BOOK 9Strateay 2: Short Straddle Explanation This strategy is just the opposite of Long Straddle. A trader should adopt this strategy when he expects less volailty in the near future, Here, a trader will sell one Call Option & one Put Option of the same strike price, same exoiry date and of the same underlying asset. If the stock/index hovers around the same levels then both the options will expire worthless and the option writer (Le, trader) will get the premium. However this is a very risky strategy. Ifthe price moves up or down sharply then the losses will be significant for the option writer (trader). So this strategy should be implemented only if you are ready to take calculated risk Le. it should be precisely quantified Risk: Unlimited Reward: Limited Construction Sell 1 Call Option Sell 1 Put Option Payotf Chart Prof SHORT STRADDLE 000 see 5400 a Bipentog Example ‘Suppose NIFTY is trading around 5200 levels, Mr. X does not expect the market to move sharply in the near future and implements a Short Straddle Strategy. He will sell one 5200 Call Option for a premium of Rs. 100 & sell one $200 Put Option for a premium of Rs, 80, Lot size of NIFTY is 50, His account will get credited by Rs. 9000. [(100+80)*50] Case 1: At oxpiry if NIFTY closes at 5000, then Mr. X will make a loss of Rs, 1000, [{(100) + (80 - 200)}*50] Case 2: At expiry it NIFTY closes at 5250, then Mr. X will make a profit of Rs. 6500. [((100-50) + (80))"50] Case 3: At expiry if NIFTY closes at 5400, then Mr. X will make a loss of Rs. 1000. [{(80) — (200-100)}*50] ‘moneycontrol.com mmm BOOK 20Strateay 3: Long Strangle Explanation A Strangle is similar to Straddle. In Strangle, a trader will purchase one OTM Call Option and one OTM Put Option, of the same expiry date and the same underlying asset. This strategy will reduce the entry cost for trader and itis also cheaper than straddle, A trader will make profits, ifthe market moves sharply n either direction and gives extra-ordinary returns in the near future so that either of the options will make money. In case of low volatility a trader will lose his entire investment i.e, the premium paid for buying the options, The volatility should be on higher side. Also, the volatility required for strangle to make profits should be more than the volatility required for straddle to make profits. Ri Limited Reward: Unlimited Construction Buy 1 OTM Call Option Buy 1 OTM Put Option Payott Chart cont LONG STRANGLE é sip sso F500 sn Stock Price 260 at Expiration Example I NIFTY is trading around 5200 levels and Mr. X expects the market to rally significantly on either side, he applies a Strangle Strategy. He buys one 5300 OTM Call Option for a premium of Rs. 55 & buys one 5100 OTM Put Option for a premium of Rs. 50. His net investment will be Rs. 5250, [(55+50)°50] Case 1:1! NIFTY expires at 4800, then Mr. X will make a profit of Rs. 9750. [{(800-50)-(55))*50] Case 2: If NIFTY expires at 5100, then Mr. X will make a loss of Rs. 5250. [(55+50)*50] Case NIFTY expires at 5600, then Mr. X will make a profit of Rs. 9750. {((300-55)-(50)}"50] ‘moneycontrol.com mmm BOOK 4Strateay 4: Short Strangle Explanation This strategy is similar to Short Straddle; the only difference is of the strike prices at which the positions are built. Short Strangle involves selling of one OTM Call Option and selling of one OTM Put Option, of the same expiry date and same underlying asset, Here the probability of making profits is more as there is a spread between the two strike prices, and if the markets do remain less volatile, then this strategy will start making profits for traders. The ideology behind this strategy is that the market will not be much volatile in the near fulure and the expected volallly will lie between the 2 strike prices. This strategy is used by expert traders who quantify the implied volatility accurately Ri Unlimited Reward: Limited Sell 1 OTM Call Option Sell 1 OTM Put Option Payoff Chart oa SHORT STRANGLE. ae ‘Stock Prive 5000 aExpaton 100 sz00 sao \s40 Example ‘Suppose NIFTY is trading around 5200 odd points, Mr. X does not expect the market to move much in the hear fulure. As he is neutral about the volalilly of NIFTY he will enter in a Short Strangle Strategy. He will sell 15300 OTM Call Option for a premium of Rs. 55 & sell 15100 OTM Put Option for a premium of Rs. 50. The lot size of NIFTY is 50, Hence, his account wil get credited by Rs, 5000, {(50+50)*50] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will neither make profit nor loss. His net cash flow will be 0. {((50)-(100-50))*50} Case 2: t expiry if NIFTY closes at 5250, then Mr, X will make a profit of Rs. 5000. [(50+50)*50] Case 3: At expiry if NIFTY closes at 5400, then Mr. X will neither make profits nor losses. His net cash flow will be 0. [{(100-50)-(50))"50] ‘moneycontrol.com mmm BOOK »Strategy 5: Long Call Butterfly Explanation A trader, who is neutral in nature and believes that there will be very low volatility i.e. expects the market to remain range bound, will implement this strategy. This strategy involves selling of 2 ATM Call Options, buying 1. ITM Call Option & buying 1 OTM Call Option of the same expiry date & same underlying asset. The difference between the strikes should be equal. If the market remains range bound then this strategy will start making profits. If the market moves out of strike range in either way, then it wil start making loss. The loss generated will also be capped. Risk: Limited Reward: Limited Construction Soll 2 ATM Call Options Buy 1 ITM Call Option But 1 OTM Call Option Payoff Chart Profit Long Call Butterfly 4000 soo sc00 Stock Price at Expiration 000 Example ‘Suppose that NIFTY is trading at 5200 levels, Mr. X thinks that there is low volatility in the market and expects itt stay between a certain range, then he will implement the Long Call Butterly Strategy. He will sel 2 NIFTY 5200 ATM Call Options for a promium of Rs. 200 (100°2), buy 1 NIFTY 5100 ITM Call Option at a promium of Rs. 165 & buy 1 NIFTY 5300 OTM Call Option at a premium of Rs. 55. The net investment will only be Rs, 1000, [((100"2)-(165)-(65))"80] Case 1: At expiry if NIFTY closes at 4900, Mr. X will make a loss of Rs. 1000. [{(100"2)-(165)-(55))*50] Case 2: At expiry if NIFTY closes at 5200, Mr. X will make a profit of Rs, 4000. [{(100-165) + (100°2)- (55)}*50] Case 3: At expiry if NIFTY closes at §400, Mr. X will make a loss of Rs. 1000. {((300-165) - ((200-100)*2) + (100-85)}*50) ‘moneycontrol.com mmm BOOKStrateay 6: Short Call Butterfly Explanation This strategy is opposite of the Long Call Butterfly Strategy, a trader expects the market to remain range bound in Long Call Butterfly, but here he expects the market to move beyond strike boundaries in Short Call Bulterlly. If the trader is bullish on the market's volaiifly, he will implement this strategy. Here also there should be equal distance between the strikes, Profits from this strategy are capped. Ri Limited Reward: Limited Buy 2 ATM Call Options Sell 1 ITM Call Option Soll 1 OTM Call Option Payoff Char Profit Short Call Butterfly lorLoss $ 1000: ‘Stock Pree at Expiration 19500 Example Suppose that NIFTY is trading at 5200, Mr. X implements the Short Cal Buttery Strategy. He buys 2 NIFTY 5200 ATM Call Options fora premium of Rs. 200 (100"2), sells 1 NIFTY 5100 ITM Call Option for a premium of Rs. 165 & sells 1 NIFTY 5300 OTM Call Option for a premium of Rs. 55. He will get a credit of Rs. 1000 [((185) + (65) ~(100°2)50] since he sold 2 Call Options, Case 1: At expiry if the NIFTY closes at 4900, then Mr. X will make a profit of Rs. 1000. [(165+55 — (100"2))"50] Case 2: At expiry if the NIFTY closes at 5200, then Mr. X will make a loss of Rs. 10500. [((100-165) + 55 - (100*2)}*50) Case 3: At expiry if the NIFTY closes at 5500, then Mr. X will make a profit of Rs. 1000. [((400-165) + ((300- 100)*2) — (200-55))*50} ‘moneycontrol.com mmm BOOK 4Strateay 7: Long Put Butterfly Explanation The Long Put Butterfly is a neutral strategy where a trader will be bearish on the volatility ie. he thinks the market will have sideways kind of movement and will not rally sharply in either direction in the near future. This strategy involves sale of 2 ATM Put Options, buy 1 ITM and 1 OTM Pul Option. The risk and reward are limited, Ri Limited Reward: Limited Sell 2 ATM Put Options Buy 1 ITM Put Option Buy 1 OTM Put Option Payoff Char Profit Long Put Butterfly som a0 ss00 ‘Stork Prices Egiraton 750 Example ‘Suppose NIFTY is trading at 5200 levels. Mr. X is bearish on volalilty and expects the markel to move sideways. He will implement Long Put Butterfly Strategy. He will sell two 5200 ATM Put Options for a premium of Rs. 85, buys one 5100 NIFTY OTM Put Option at a premium of Rs. 50 & goes long on one 5300 NIFTY ITM Put Option al a premium of Rs. 135. His nel investment will be Rs, 750. [(85"2)-50-135)"50] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will make a loss of Rs. 750. [((100-80) ~ ((200-85)*2) + (800-135))"50] Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a profit of Rs. 4250. [((85"2) - (50) + (100- 1935))"50] Case 3: At expity i NIFTY closes at 5400, then Mr. X will make a loss of Rs. 750 (Investment value). [((85°2)- (60}-(135))*50) ‘moneycontrol.com mmm BOOKStrateay 8: Short Put Butterfly Explanation In Short Put Butterfly strategy, a trader is neutral in nature and expects the market to remain range bound in the near future. A trader will buy 2 ATM Put Options; sell 1 ITM & 1 OTM Put Options. Here risk and returns both are limited. Risk: Limited Reward: Limited Construction Buy 2 ATM Put Options Sell 1 ITM Put Option Sell 1 OTM Put Option Payoff Char Profit Short Put Butterfly JorLos ¢ 724 o} - Sock Pre Expatica 125 Example ‘Suppose NIFTY is trading at $200 odd points. Mr. X is bearish on volatility and expects the market to move upwards gradually al a very slow pace. He will implement Short Put Butterfly Strategy. He will buy two 5200 ATM Put Options at a premium of Rs. 85, sell one 5100 NIFTY OTM Put Option for a premium of Rs. 50 & shorts one 6300 NIFTY ITM Put Option for a premium of Rs. 135. Case 1: At expity if NIFTY closes at 5000 level, then Mr. X will make a profit of Rs. 750. [(((200-85)*2) - (100- 50) - (800-135)}"50] Case 2: At expiry if NIFTY closes at 5200 level, then Mr. X will make a loss of Rs. 4250. [((50)-(85"2)-(100- 135))"50] Case 3: At expiry if NIFTY closes at 5400 level, then Mr. X will make a profit of Rs. 750. [(50) - (852) + (138)°59) ‘moneycontrol.com mmm BOOK 6Strategy 9: Strap Explanation Strap Strategy is similar to Long Straddle, the only difference is the quantity traded. A trader will buy two Call Options and one Put Options. In this strategy, a trader is very bullish on the market and volatility on upside but wants to hedge himselt in case the slock doesn’t perform as per his expectalions. This strategy will make more profits compared to long straddle since he has bought 2 calls Ri Limited Reward: Unlimited Buy 2 ATM Call Options Buy 1 ATM Put Option Payoff Chart Pro orLos + STRAP sao / ss00 a * 4900 Sock rice Expiration] 19250-) Example Mr. X is bullish on NIFTY and enters in a Strap Strategy. He buys two 5200 NIFTY ATM Call Options at a premium of Rs. 100 and simultaneously buys one 5200 ATM Put Oplion at a premium of Rs. 85. His net investment will be Rs. 14250 [((100*2) + (85))"50), Case 1: t expiry if NIFTY closes at 4900, then Mr. X will make a profit of Rs. 750. {((800-85) + (0-200)}*50] Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a loss of Rs. 14250 (Entire investment amount). [(0-200) + (0-85)}"50] Case 3: At expiry if NIFTY closes at 400, then Mr. X will make a profit of Rs. 5750. [(((200-100)*2)-(85)}*50) ‘moneycontrol.com mmm BOOK ”Strateay 10: Strip Explanation Strip Strategy is the opposite of Strap Strategy. When a trader is bearish on the market and bullish on volatility then he will implement this strategy by buying two ATM Put Options & one ATM Call Option, of the same strike price, expiry date & underlying assel. If the prices move downwards then this strategy will make more profits compared to short straddle because of the (double) quantity involved. Ri Limited Reward: Unlimited Buy 2 ATM Put Options Buy 1 ATM Call Option STRIP 5400 sock Prise ZEyiraiog Payoff Chart Prost a 13800 Example Mr. X is bearish on NIFTY and enters in a Strip Strategy, buys 2 5200 NIFTY ATM Put Options at a premium of Rs. 85, buys 1 5200 ATM Call Option al a premium of Rs. 100. His net investment will be Rs. 13500 [((85*2) + (100))"50] Case 1: At expity if NIFTY closes at 4900, then Mr. X will make a profit of Ris, 16500. {(((300-85)*2) - (100)}"50] Case 2: At expity it NIFTY closes at 5200, then Mr. X will make a loss of Rs. 13500 (entire investment value). [{((0-85)*2) + (0-100)}*50] Case 3: At expiry if NIFTY closes at 5400, then Mr, X will make a loss of Rs, 3500, [((200-100)-(85*2))*50] ‘moneycontrol.com mmm BOOK 28Strategy 11: Long Call Ladder Explanation Long Call Ladder Strategy is an extension to Bull Call Spread Strategy. A trader will be slightly bullish about the market, in this strategy but bearish over volatility. It involves buying of an ITM Call Option and sale of 1 ATM & 1 OTM Call Options. However, the risk associated with this strategy is unlimited and reward is limited. Risk: Limited Downside Risk, Unlimited Risk to the Upside Reward: Limited Construction Buy 1 ITM Call Option Sell 1 ATM Call Option Soll 1 OTM Call Option Payoff Chart Profit LONG CALL LADDER sre x Ewiraion $300 3005400 \\g800 1250 Example ‘Suppose NIFTY is trading at 5200 odd levels. Mr. X feels that the market will slightly rise with less volatility. He buys 1 5100 ITM Call Option at a premium of Rs. 165, sells 1 5300 ATM Call Option for a premium of Rs. 55 & sells 1 5400 OTM Call Option for a premium of Rs. 25. Mr. X's net investment will be Rs. 4250. [(165-55- 25°50] Case 1: At expiry if Nifty closes at 5100, then Mr. X will make a loss of Rs. 4250. [((55+25)-(165))*50] Case 2: At expiry it Nifty closes at 5300, then Mr. X will make a profit of Rs. 5750. [{(200-165) + (55) + (25))°50] Case 3: At expiry if Nity closes at $500, then Mr. X will make a profit of Rs. 750, [((400-165)-(200-85)-(100- 25))"50] ‘moneycontrol.com mmm BOOK 29Strateay 12: Long Put Ladder Explanation Long Put Ladder can be implemented when a trader is slightly bearish on the market and volatifty. It involves buying of an ITM Put Option and sale of 1 ATM & 1 OTM Put Options. However, the risk associated with this strategy is unlimited and reward is limited, Ri : Unlimited Reward: Limited Buy 1 TM Put Option Sell 1 ATM Put Option Soll 1 OTM Put Option Payoff Char LONG PUT LADDER orLows ¢ ora Stock Price Expatica 5000 " a 2m Example ‘Suppose NIFTY is trading at 5200 levels. Mr. X feels that the market will slightly dip and willbe less volatile. He buys one 400 ITM Put Option at a premium of Rs. 200, sells 1 5200 ATM Put Option for a premium of Rs. 85 & sells 1 5100 OTM Put Option for a premium of Rs. 50. Mr. X's net investment will be Rs, 3250. [(200-85-50°50] Case 1: At expiry if Nifty closes at 5100, then Mr. X will make a profit of Rs. 6750. [{(300-200) - (100-85) + (50))"50] Case 2: At ext (50)}*50] if Nifty closes at 5300, then Mr. X will make a profit of Rs. 1750. [{(100-200) + (85) + Case 3: At expiry if Nifty closes at 5500, then Mr. X will make a loss of Rs. 3250. [((55) + (25) - (200))*50] ‘moneycontrol.com mmm BOOK 30Strategy 13: Short Call Ladder Explanation This strategy is implemented when a trader is moderately bullish on the market, and volatility. It involves sale of an ITM Call Option, buying of an ATM Call Option & OTM Call Option. The risk associated with the strategy is limited, Risk: Limited Reward: Unlimited Break-Even Poil : Long Call Strikes (Sum) — Short Call Strike +/- Premium Paid/Received Construction Sell 1 ITM Call Option Buy 1 ATM Call Option Buy 1 OTM Call Option Payoff Chart i. ‘SHORT CALL LADDER 5500 ° “ s000 5100 Stock Price 500 a Expraon Example ‘Suppose NIFTY is trading at 5200 levels, Mr. X is bullish on the market and expects it to rise in the near future. He also expects the volatility to shoot up with rise in prices. Lot size of NIFTY is 50. He will soll one 5100 NIFTY ITM Call Option for a premium of Rs. 8250 (65°50), buy one 5200 NIFTY ATM Call Option at premium of Rs. 5000 (100°50) & buy 5300 NIFTY OTM Call Option at a premium of Rs. 2750 (55°50). His net invostmont will bo Rs. 500. [(165-100-55)"50] Case 1: At expiry if NIFTY closes at 4900, then Mr, X will make a profit of Rs, 500, [(165-100-55)*50] Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a loss of Rs. 4500. [((100)-(55)-(100- 165))"50) Case 3: At expiry if NIFTY closes at $500, then Mr. X will make a profit of Rs. $500. [{(800-100) + (200-55) - (400-165))*50] ‘moneycontrol.com mmm BOOK 41Strateay 14: Short Put Ladder Explanation This strategy is implemented when a trader is slightly bearish on the market. A trader is required to be bullish over the volatifiy in the market. It involves sale of an ITM Put Option and buying of 1 ATM & 1 OTM Put Options. However, the risk associated with this strategy is limited, Ri Limited Reward: Unlimited Sell 1 ITM Put Option Buy 1 ATM Put Option Buy 1 OTM Put Option Payoff Char Pott SHORT PUT LADDER sono socket 100 sat0/ Shin so 4200 00 s00 Example ‘Suppose NIFTY is trading at 5200 levels, Mr. X is bearish on the markel and expects it to fall in the near future along with the rise in volatility. Lot size of NIFTY is 50. He will sell one 5300 NIFTY ITM Put Option for a premium of Rs. 6700 (135*50), buy one 5200 NIFTY ATM Put Option at a premium of Rs, 4250 (85°50) & buy one 5100 NIFTY OTM Put Option at a premium of Rs. 2500 (50°50). Mr. X net investment will be zero as the sale of ITM Put Option will totally engulf the cost of buying ATM & OTM Put Options. Case 1: At expiry if NIFTY closes at 4900, then Mr, X will make a profit of Fis. 5000, [((300-86) + (200-50) — (400-135)}*50] Case 2: At expiry if NIFTY closes at 5200, then Mr, X will make a loss of Rs, 8500. [{(100-135) - (85) - (50)}"50] Case 3: At expiry if NIFTY closes at 5500, then Mr. X will neither make profit nor loss. His net payoff will be zero. [(135-85-50)"50] ‘moneycontrol.com mmm BOOK 2Strateay 15: Long Call Condor Spread Explanation This strategy is implemented when a trader is bearish on the volatility and expects the market to move sideways. Using Call Options of the same expiry date, he will buy one Deep ITM Call Option, sell 1 ITM Call Option, sell 1 OTM Call Option, buy 1 Deep OTM Call Option. The risk and reward both are limited due to offsetting of long and short positions. For this strategy to make profits the underlying asset should remain range bound i.e, between the 4 strikes, Risk: Limited Reward: Limited Construction Buy 1 Deep ITM Call Option Sell 1 ITM Call Option Sell 1 OTM Call Option Buy 1 Deep OTM Call Option Payoff Chart Profit THE CONDOR or Loss] 2750} 000 5400 é 5 Stock Price at Expiraton| 2260 Example ‘Suppose NIFTY is trading at 5200 lovols, Mr. X is bearish on volatility and expects the market to move sideways. He will buy one 5000 Deep ITM Call Option for a premium of Rs. 240, sell one 5100 ITM Call Option at a premium of Rs. 165, sell one 5300 OTM Call Option for a premium of Rs. 55, buy one 5400 Deep OTM Call Option at a premium of Rs. 25. His net investment will be Rs. 2250. [((165+55)-(240+25))"50]) Case 1: At expiry if NIFTY closes at 4900, then Mr, X will make a loss of Rs, 2250, (His investment value) Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a profit of Rs. 2750. [((55) + (200-240) + (165- 100) — (25)}°50) Case 3: At expiry if NIFTY closes at 5500, then Mr. X wll make a loss of Rs. 2250. [((500-240) — (400-165) - (200-86) + (100-25)}*50] ‘moneycontrol.com mmm BOOKStrateay 16: Short Call Condor Spread Explanation ‘Short Call Condor Spread is the opposite of Long Call Condor Spread i.e. sell 1 Deep ITM Call Option, buy 1 ITM Call Option, buy 1 OTM Call Option, sell 1 Deep OTM Call Option. Similar to Long Call Condor, the risk and rewards associated with this strategy are limited, Credit is received at the time of entering into this strategy. Risk: Limited Reward: Limited Construetion Sell 1 Deep ITM Call Option Buy 1 ITM Call Option Buy 1 OTM Call Option Sell 1 Deep OTM Call Option Payoff Chart iam SHORT CONDOR 2250 sion s200 si00 /si00 ‘000 kre 2 Expat 2780 Example ‘Suppose NIFTY is trading at $200 odd points, Mr. X implements the Short Call Condor Spread. He will sell 1 5000 Deep ITM Call Option for a premium of Rs. 240, buy 1 5100 ITM Call Option at a premium of Rs. 165, buy 1 5300 OTM Call Option for a premium of Rs. $5, sell 1 5400 Deep OTM Call Option at a premium of Rs. 25. His account will be credited by Rs. 2250. {((240+25)-(165+58))*50], Case 1: At expiry if NIFTY closes at 4900, then Mr. X will get to keep his premium Rs. 2250. Gase 2: At expiry if NIFTY closes at 5200, then Mr. X wil make a loss of Rs, 2750, [{(55) - (200-240) + (100- 165) + (25))°50] Case 3: At expiry if NIFTY closes at 5500, then Mr. X will make a profit of Rs. 2250. {((400-165) + (200-55) - (500-240) — (100-25))*50] ‘moneycontrol.com mmm BOOK aStrateay 17: Neutral Calendar Spread Explanation This strategy is implemented if the trader is neutral in the near future for say 2 months or so. This strategy involves writing of Near Month 1 ATM Call Option and buying 1 Mid Month ATM Call Option, hence reducing the cost of purchase, with the same strike price of the same underlying asset, This strategy is used when the trader wants to make money from the rapid time decay of the option, Ri Limited Reward: Limited Sell 1 Near-Month ATM Call Option Buy 1 Mid-Month ATM Call Option Payoff Chart Prit | NEUTRAL CALENDAR SPREAD ort (Gew-lerm Eplaen) 20 sto ss00 a ane -a7e0 Example ‘Suppose that NIFTY is trading at 5300 levels, Mr. X is neutral about the market and expects it to remain sideways in the near fulure say 2 months or so. Hence, he will implement this Neutral Calendar Spread Strategy, he will sell 1 5300 NIFTY April (near-month) ATM Call Option for a premium of Rs. 65 and buy 1 5300 NIFTY May (mid-month) ATM Call Option at a premium of Rs, 160. The lot size of NIFTY is 50. Hence, his net investment wil be Rs. 4750. (160-65)°50] Case 1: At Near-Month (April) expiry if NIFTY closes at 5000, then Mr. X will got to keep the premium amount i.e, Rs. 3250, (65°50). Al Mid-Month (May) expiry if NIFTY closes at 4800, then Mr. X will make a loss of premium amount .e. Rs. 8000 (160°250). His net payoff will result in a loss of Rs. 4750 (3250-8000) Case 2: At Near-Month (April) expiry if NIFTY closes at 5100, then Mr, X will get to keep the premium amount i.e. Rs. 3250. (65°50). At Mid-Month (May) expiry if NIFTY closes at 5300, then Mr. X will make a loss of premium amount i.e, Rs, 8000 (160°250). His net payoff will result in a loss of Rs, 4750 (3250-8000) Case 3: At Near-Month (Apri) expiry it NIFTY closes at 5500, then Mr X will incur a loss of Rs. 6750 [(200- 65)'50], At Mid-Month (May) expiry if NIFTY closes at 5700, then Mr. X will make a profit of Rs. 12000 [(400- 160)*250]. His net payoff will result in a profit of Rs. 5250 (12000-6750) ‘moneycontrol.com mmm BOOKStrateay 18: Long Guts Explanation This strategy is implemented by a trader when he is neutral on the movements and bull’sh on volatility i.e. he expects the stock to move in either direction with high magnitude. This strategy involves buying 1 ITM Call Option and 1 ITM Put Option. This strategy can be called as Debit Spread because trader's account is debited at the time of entering the positions, Ri Limited Reward: Unlimited Buy 1 ITM Call Option Buy 1 ITM Put Option LONG 5350 socuerce Payoff Chart Profit or Loss ¢ a 70) Example ‘Suppose NIFTY is trading around 5250 odd points. Mr. X is bullish on the volatility and expects the market to ‘move significantly in either direction in the near future. Long Guts Strategy involves buying 1 5200 NIFTY ITM Call Option at a premium of Rs. 100 and buying 1 $300 NIFTY ITM Put Option at a premium of Rs. 135. His net investment will be Rs. 11750, [(100+135)"50] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will make a profit of Rs. 3250. [{(300-135)-(100))*50] Case 2: At expiry if NIFTY closes at 5250, then Mr. X will incur a loss of Rs, 6750. [{(50-100) + (50-135))*50] Case 3: ‘moneycontrol.com mmm BOOK \t expiry if NIFTY closes at 5500, then Mr. X will make a profit of Rs. 6750. {(300-100)-(135))*50] 36Strateay 19: Short Guts Explanation This strategy is implemented by a trader when he is neutral on the movements and bearish on volatility i. he expects the stock to be range bound in the near future. This strategy involves sale of 1 ITM Call Option and 1 ITM Put Option. This strategy can be called as Credit Spread since his account is credited at the time of entering in the positions. Ri : Unlimited Reward: Limited Sell 1 ITM Call Option Sell 1 ITM Put Option Payotf Chart sean stor GUTS we sek Pre 5150 Enron e359 Example ‘Suppose NIFTY is trading around 5250 odd points, Mr. X is bearish on volatility and expects the market to be range bound in the near fulure. Short Guts Strategy involves selling of 1 5200 NIFTY ITM Call Option at a premium of Rs. 100 and selling 1 $300 NIFTY ITM Put Option at a premium of Rs. 135. His net credit amount will be Rs. 11750. {(100+135)*50}] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will make a loss of Rs. 3250, [{(100}-(300-135))°50] Case 2: At expiry if NIFTY closes at 6250, then Mr. X will make a profit of Rs. 6750. {((100-50) + (135- 50)}"50] Case 3: At expiry if NIFTY closes at 5500, then Mr, X will make a loss of Rs, 3250, [{(135)-(300-100))*50) ‘moneycontrol.com mmm BOOK 9Strategy 20: Ratio Call Spread Explanation ‘As the name suggests, a ratio of 2:1 is followed i.e. buy 1 ITM Call and simultaneously sell OTM Calls double the number of ITM Calls (In this case 2). This strategy is used by trader who is neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited since he is selling two calls. Risk: Unlimited Reward: Limited Construction Buy 1 ITM Call Option Sell 2 OTM Call Options Payot Char CALL RATIOSPREAD. Stok Price Expat Sion S900 Seah Example ‘Suppose NIFTY is trading around 5200 odd poi ity and neutral on the market, He will buy 1 NIFTY 5100 ITM Call Option at a premium of Rs. 165 and sell 2 5300 NIFTY OTM Call Options for a premium of Rs. 110 (55*2). His net investment will be Rs. 2750. [(1 10-165)°50] Case 1: t expiry if NIFTY closes at 5000, then Mr. X will lose his entire investment value i.e. Rs. 2750. Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a profil of Rs. 2250. {(55*2) + (100-165)}*50] Case 3: At oxpity if NIFTY closes at $400, then Mr. X will make a profit of Rs, 2250. [{(300-165) — ((100- 55)"2))"50] ‘moneycontrol.com mmm BOOK 38Strategy 21: Ratio Call Write Explanation This strategy involves buying of an underlying asset in the cashfutures market and simultaneously selling ATM Calls double the number of long quantity. This strategy is used by a trader who is neutral on the market and bearish on the volatity in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimites, Risk: Unlimited Reward: Limited Construction Buy 1 NIFTY in Futures Market Sell 2 NIFTY ATM Call Options Payot Char RATIO CALL WRITE Example ‘Suppose NIFTY is trading around 5200, Mr. X is bearish on volatility and neutral on market. He will buy 1 NIFTY Future @ 5200 and sell 2 5200 ATM Call Options for a premium of Rs. 10000 (100°2), Lot size of NIFTY is 50. His net investment will be Rs. 250000, [(5200-200)*50] Case 1: At expity if NIFTY closes at $000, then Mr. X will neither make profit nor loss. [((100*2) + (5000- 5200))°50] Case 2: At expiry if NIFTY closes at 5200, then Mr. X will get to Keep the premium amount by sale of two 5200 NIFTY ATM Call Options, Rs. 10000. {(100"2)*50] Case 3: At expiry if NIFTY closes at 400, then Mr. X will neither make profit nor loss, his payotf will be zero. [((6400-5200) — ((200-100)*2))*50) ‘moneycontrol.com mmm BOOK 30Strateay 22: Ratio Put Spread Explanation This strategy involves buying ITM Puts and simultaneously selling OTM Puts, double the number of ITM Puts. This strategy is used by a trader who is neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited. Risk: Unlimited Reward: Limited Construction Buy 1 ITM Put Option Sell 2 OTM Put Options Payoif Char Profit + or Loss PUT RATIO SPREAD a280-| a . S100 Sockrice Expatica Example ‘Suppose that NIFTY is trading around 5200 odd points, Mr. X is bearish on volatility and neutral on market, He will buy 1 NIFTY 8300 ITM Put Option at a premium of Rs. 136 and sell 2 5100 NIFTY OTM Put Options for a premium of Rs. 100 (50°2). His net investment will be Rs. 1750. [(100-135)"50] Case 1: At expiry if NIFTY closes at 5000, then Mr, X will make a profit of Rs, 3250. [{(800-135) — ((100- 50)"2))"50] Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a profit of Rs. 3250. ({(50"2) + (100-135))*50} Case 3: At expiry if NIFTY closes at 5400, then Mr. X will make a loss of Rs. 1750. [((185) ~ (50*2)}*50] ‘moneycontrol.com mmm BOOK 0Strategy 23: Ratlo Put Write Explanation This strategy is implemented by selling (short) the underlying asset in the cash/futures market. Simultaneously, sell ATM Puts double the number of long quantity. This strategy is used by a trader who in neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited Risk: Unlimited Reward: Limited Construction Sell 1 NIFTY Future Sell 2 NIFTY ATM Call Options Payoff Chant Prost + Jor Loss RATIO PUT WRITE, 8500 Sok Price Expiration] Example ‘Suppose NIFTY is trading around 5200 odd points, Mr. X is bearish on volatility and neutral on market. He will soll (short) 1 NIFTY Future @ 5200 and soll 2 5200 ATM Put Options (CMP Rs 85) for a premium of Rs, 8500 (852). Lot size of NIFTY is 50. Case 1: At expiry if NIFTY closes at 5000, then Mr. X will make a loss of Rs. 1500. [{(85-200)"2 + (5200- 5000)}*50) Case 2: At expiry if NIFTY closes at 5200, then Mr. X will get to keep the premium amount by sale of $200 NIFTY OTM Put Options of Rs, 8500. [(85"2)*50] Case 3: At expiry if NIFTY closes at 5400, then Mr. X will make a loss of Rs. 1500. [{(5200-5400) + (85°2)}"50} ‘moneycontrol.com mmm BOOK aStrateay 24: Iron Condors Explanation Iron Condor is a neutral trading strategy. A trader tries to make profit from low volatility in the price of the underlying asset. This strategy will be better understood if you recall ‘Bull Put Spread’ & ‘Bear Call Spread’. A trader will buy one Deep OTM Put Option and sell one OTM Put Oplion,. He will also sell one OTM Call Option and buy one Deep OTM Call Option, Ri Limited Reward: Limited Buy 1 Deep OTM Call Option Sell 1 OTM Call Option Soll 1 OTM Put Option Buy 1 Deep OTM Put Option Payalt Chart ne IRON CONDOR 2000 000 510 seco) ‘Stock Price 200 Example ‘Suppose NIFTY is trading at $200 odd points, Mr. X is bearish on volatility and neutral on market. He will sell ‘one 400 NIFTY OTM Call Option for a premium of Rs. 25, buy one 5500 NIFTY Deep OTM Call Option at a premium of Rs. 10, sell one 5100 NIFTY OTM Put Option for a premium of Rs. 50, buy one 5000 Deep OTM Put Option at a premium of Rs. 25. Lot size of NIFTY is 50. His account will get credited by Rs. 2000. [((25+50)-(10+25))*50) Case 1: At expiry if NIFTY closes at 4800, then Mr. X will incur a loss of Rs. 3000. [((25) — (10) ~ (300-50) + (200-25)}*50] Case 2: At expiry if NIFTY closes at 5300, then Mr. X gets to keep the premium amount that was credited at the time of entering the positions i.e. Rs. 2000. Case 3: At expiry if NIFTY closes at §700, then Mr. X will incur a loss of Rs. 3000. {((200-10) — (300-25) + (60) - (25)}°50] ‘moneycontrol.com mmm BOOK »Strategy 25: Iron Butterfly Explanation This strategy is implemented when a trader is bearish on the volatility of market and neutral on the market movements. A trader will buy 1 OTM Put Option, sell 1 ATM Put Option, sell 1 ATM Call Option, buy 1 OTM Call Option. Due to offsetting of long and short positions, this strategy bags limited profit with limited risk. Risk: Limited Reward: Limited Construction Buy 1 OTM Call Option Sell 1 ATM Call Option Sell 1 ATM Put Option Buy 1 OTM Put Option Payoff Chart Pot IRON BUTTERFLY 4000 st00 $300 i . * Expiration A000: Example ‘Suppose NIFTY is trading at 5200 odd points, Mr. X is bearish on volatility and neutral on market movements. He will sell 15200 NIFTY ATM Call Option for a premium of Rs. 100, buy 1 5300 NIFTY OTM Call Option at a premium of Rs. 55, sell 1 5200 NIFTY ATM Put Option for a premium of Rs. 85, buy 1 5100 OTM Put Option at a premium of Rs, 50. Lot size of NIFTY is 50, Mr. X’s account will get credited by Rs. 4000, [((100485)- (50+55)}"50] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will incur a loss of Rs. 1000. [{(100) — (55) — (200-85) + (100-50))"50) Case 2: At expiry if NIFTY closes at 5200, then Mr. X gets to keep the premium amount that was credited at the time of entering the positions i.e. Rs. 4000. Case 3: At exoity of NIFTY closes at $400, then Mr. X will incur a loss of Rs. 1000. ((200-100) ~ (100-55) + (@5)~ (60))50] ‘moneycontrol.com mmm BOOKStrategy 26: Reverse Iron Condor Explanation Reverse Iron Condor as the name suggests is the opposite of Iron Condors. In Reverse Iron Condor, a trader is bullish about volatility and expects the market to make a significant move in the near future in either direction, Here a trader will buy 1 OTM Call Option, sell 1 Deep OTM Calll Option, buy 1 OTM Put Option, sell 1 Deep OTM Put Option. This strategy also bags limited profits with limited risk Risk: Limited Reward: Limited Construction Soll 1 Deep OTM Call Option Buy 1 OTM Call Option Buy 1 OTM Put Option Soll 1 Deep OTM Put Option Payoff Chart Profit orLoss REVERSE IRON CONDOR 220 son sar, 0 + as Steck rice 2780 atspiatcn Example ‘Suppose NIFTY is trading at 5200 odd points, Mr. X is bullish on volatility and indecisive on market movements. He will sell 1 8400 NIFTY Deop OTM Call Option for a promium of Rs, 25, buy 1 5300 NIFTY OTM Call Option at a premium of Rs. 55, buy 7 5100 NIFTY OTM Put Option for a premium of Rs. 50, sell 1 5000 Deep OTM Put Option at a premium of Rs. 25. Lot size of NIFTY is 50. Mr. X's account will be debited by Rs. 2750. [{(25+25)-(55+50)}*50) Case 1: At oxpity it NIFTY closes at 4800, then Mr. X will make a profit of Rs, 2250, [((25) — (55) + (300-50) - (200-25))"50] Case 2: At oxpity if NIFTY closes at 5200, then Mr, X wil lose the premium amount that was paid at the time of entering the positions i.e. Rs. 2750. Case 3: At expiry if NIFTY closes at 5600, then Mr. X will make a profit of Rs, 2250. ((800-55) — (200-25) — (60) + (25)}*50] ‘moneycontrol.com mmm BOOKStrateay 27: Reverse Iron Butterfly Explanation Reverse Iron Butterfly as the name suggests is the opposite of Iron Butterfly. In Reverse Iron Butterfly, a trader is bullish on volatility and expects the market to make significant move in the near future in either directions. Here a trader will buy 1 ATM Call Option, sell 1 OTM Call Option, buy 1 ATM Put Option, sell 1 OTM Put Option. This strategy also bags limited profit with limited risk, Ri Limited Reward: Limited Sell 1 OTM Call Option Buy 1 ATM Call Option Buy 1 ATM Put Option Soll 1 OTM Put Option Payolf Chart ee REVERSE IRON BUTTERFLY 1000 ° ‘ Shack cea Exiaton 000 Explanation ‘Suppose NIFTY is trading around $200 odd points and Mr. X is bullish on the market volatility. He will sell 1 5300 OTM Calll Option for a premium of Rs. 85, buy 1 5200 ATM Call Option at a premium of Rs. 100, buy 1 5200 ATM Put Option at a premium of Rs. 85, sell 15100 OTM Put Option for a premium of Rs. 50. Lot size of NIFTY is 50. His net investment will be Rs. 4000. [{(50+55)-(100+85))*50] Case 1: At expiry if NIFTY closes at 5000, then Mr. X will make a profit of Rs, 1000. [((55) - (100) + (200-85) — (100-50)}*50] Case 2: At expiry if NIFTY closes at 5200 levels, then Mr. X lose the premium amount that was paid at the time of entering the positions I.e. Rs. 4000. Case 3: At expiry if NIFTY closes at 5400, then Mr. X will make a profit of Rs. 1000. [{(200-100) — (100-55) — (85) + (50)"50) ‘moneycontrol.com mmm BOOKBEARISH STRATEGIESStrategy 1: Short Call Explanation A trader shorts or writes a Call Option when he feels that underlying stock price is likely to go down. Selling Call Opt a strategy preferred for experienced traders. However this strategy is very risky in nature. If the stock rallies on the upside, your risk becomes potentially Unquantitiable and unlimited, If the strategy works out in your favor then you will pocket the premium amount as your reward, Risk: Unlimited Reward: Limited Constructi Sell 1 Call Option Payoff Chart Profit ‘econ oy Example If the NIFTY is trading around 5300 levels, Mr. X feels that Nifty is likely to fallin the near future then he will sell one 5400 Call Option for a premium of Rs. 120. Mr. X will gat a crecit of Rs 6000 (120°50) in his account for selling or writing the call option. Case 1: NIFTY closes at 5200 levels, Mr. X will bag the premium amount i.e. Rs. 6000. (120°50) Case 2: NIFTY closes at $600 levels; Mr. X will incur a loss of Rs. 4900. Premium Price * 80} [(5400-5600) + 120)*50] ‘moneycontrol.com mmm BOOK [(Strike Price - Expiry Price) + 46Strateay 2: Long Put Explanation This strategy is implemented by buying 1 Put Option ie. a single position, when the person is bearish on the market and expects the market to move downwards in the near future. Risk: The maximum loss will be the premium amount paid Reward: The profits will be limited by the maximum fall in the underlying asset price i.e. potentially null value (i.e. zero 0’) Construction Buy 1 Put Option Payoff Chart Profit lor Less} LONG PUT Stock Price soo at Expiratiog ston e700 5780 Example Mr. X is bearish on NIFTY and expecis the market to move downwards in the near future. NIFTY is currently trading around Rs, 5200 level, Lot size of NIFTY is 50, Mr. X buys 1 5300 Put Option of NIFTY for a premium of Rs. 115. His initial investment will be Rs. 5750. (115*50) Case 1: If the market moves as per Mr. X's expectations and dips down to Rs. 5100 level, then the net profit will be Rs. 4250. [(200-115)*50] Case 2: If the market moves upwards against his expectations then the maximum lossirisk will be the premium amount paid i.e. Rs. 5750. (115°50) ‘moneycontrol.com mmm BOOK aStrateay 3: Protective C: Explanation This strategy is simply the reversal of the Synthetic Call Strategy. This strategy is implemented when a trader is bearish on the market and expects to go down. Trader will short underlying stock in the cash market and buy either an ATM Call Option or OTM Call Option. The Call Option is bought to protect / hedge the upside risk on the short position, The net payoff will be similar to that of Long Put. Risk: Limited Reward: Unlimited Construction Sell 250 RIL Shares Buy 1 ATM Call Option Payoff Char Profit corLow } \\. PROTECTIVE CALL Short Stock Stock Price am at Expiration 0 L - 260 740, ca’Gption Example RiLis trading at Rs, 745 levels; Mr. X is bearish and expects the stock to fallin the near future. He shorts 250 shares of RIL @ Rs. 745 in the futures markel. Remember when you short in cash market you have to cover it by end of the day, so here you will short in the futures market so that you can hold your short positions til expiry. In order to edge himself in short positions, he will buy one 740 ATM Call Option at a premium of Rs. 22. The lot size of RIL Option is 250. Case 1: At expiry if RIL falls up to Rs. 720, then Mr. X will make a profit of Rs. 750. [(745-720)-22)*250] Case \t expiry f RIL stays at Rs. 742, then Mr. X will make a loss of Rs. 4250, [(745-742) + (2-22)"250] Case 3: At expiry if RIL goes up to Rs, 760, then Mr, X will make a loss of Rs, 4250 [((745-760) + (20- 22))"250]. Here Mr. X will make loss both on his short position and long call position ‘moneycontrol.com mmm BOOK 48Strateay 4: Covered Put Explanation This strategy is exactly opposite to Covered Call Strategy. Here the investor is neutral or moderately bearish in nature and wants to take advantage of the price fall in the near future. The trader will short one lot of stock fulure. Now the trader will short ATM Put Option, the option stike price will be his exil price. It the prices rally above the strike price, the Put Option will become ITM and will be squared off. If the prices slay below the strike price, then the trader will square off his Futures position and make money and also pocket the Put Option premium. Ri Uniimited Reward: Limited Constru Sell (Shor) 1 lot of NIFTY Sell (Short) 1 NIFTY OTM Put Option Payotf Chart Profitor, ee COVERED PUT 000. 5400 0 + + . aay Stock Price at Expiration Example NIFTY is trading at 5200 levels; Mr. X is neutral or moderately bearish and expects the NIFTY to fall. NIFTY lot size is 50. He shorts 1 NIFTY Futures, and simultaneously writes one 5200 ATM Put Option for a premium of Rs 100. Case 1: On expiry, if NIFTY closes at 5000 level, then Mr. X will make a profit of Rs, 5000, [(5200-5000) + (100-200}*50) Case 2: On expiry, if NIFTY closes at 5200, then Mr, X will make a profit of Rs 5000. [(5200-5200) + 100°50] Case 3: On expiry, if NIFTY closes at 5400 level, then Mr. X will make a loss of Rs $000. [(5200-5400) + 10°50] ‘moneycontrol.com mmm BOOK 9